After a week where the Federal Reserve turned decidedly “dovish”, a widely watched section of the U.S. yield curve inverted on Friday for the first time since 2007. The spread between rates on 3-month bills and 10-year Treasuries fell below zero amid a global bond rally.
Inverted yield curves attract attention from the economic community not only because of their rare occurrence, but also due to their historical reliability as a leading indicator of recession. If the patterns from the past materialize, one can expect a lower interest rate environment in the coming months.
That being said, the historical correlation may lead one to incorrectly assume that yield curve inversions will cause a recession. This is typically not the case as the negative spread merely signals the Fed’s next move is likely to be an interest rate cut due to slowing economic conditions.
At this point we believe the U.S. economy, while slowing, should continue to expand in the coming quarters and do not anticipate a recession in 2019. The headlines today may cause angst but should be viewed in the context of normal monetary policy shifts.
Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome – including performance – is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.